Treasury Indicates Narrow Application of IRS Reporting for Digital Asset Transactions | Practical Law

Treasury Indicates Narrow Application of IRS Reporting for Digital Asset Transactions | Practical Law

The US Department of Treasury issued a response to a letter from a group of US senators to indicate that it is inclined to adopt a narrow interpretation of the term "broker" in the context of the Infrastructure Investment and Jobs Act (IIJA), which would limit compliance requirements for digital asset transactions to parties that can provide information useful to the IRS.

Treasury Indicates Narrow Application of IRS Reporting for Digital Asset Transactions

by Practical Law Finance
Published on 02 Mar 2022USA (National/Federal)
The US Department of Treasury issued a response to a letter from a group of US senators to indicate that it is inclined to adopt a narrow interpretation of the term "broker" in the context of the Infrastructure Investment and Jobs Act (IIJA), which would limit compliance requirements for digital asset transactions to parties that can provide information useful to the IRS.
On February 11, 2022, Jonathan Davidson, Assistant Secretary of Legislative Affairs for the US Department of Treasury, issued a response (response letter) to a letter from a group of US senators requesting clarification of the term "broker" in the context of the Infrastructure Investment and Jobs Act of 2021 (IIJA). The response letter indicates that Treasury is inclined to adopt a narrow interpretation of the term, which would limit compliance requirements for digital asset transactions to parties that can provide information useful to the Internal Revenue Service (IRS).
A broad interpretation of the term "broker" in the context of IIJA could subject parties that are peripheral to digital asset transactions, including cryptominers, software developers, and those validating cryptocurrency transactions or selling cryptocurrency storage devices, to the reporting and compliance requirements of IIJA (see Legal Update, Broker Reporting Rules for Digital Assets Enacted as Part of Infrastructure Investment and Jobs Act).
The response letter noted further that the proposed rules would be similar to current securities laws for broker reporting of securities transactions. Current regulations only impose broker reporting obligations on market participants engaged in activities that give them access to information about the sale of securities by taxpayers. Davidson noted in the response letter that Treasury will consider the differences between the securities and digital asset markets in light of "technological characteristics" that drive the digital asset area.
In their letter, dated December 14, 2021, the senators expressed to Secretary of the Treasury Janet Yellen their concern that there would be an overly broad interpretation of Section 80603 of the IIJA, which will standardize information reporting by brokers of digital assets for tax reporting purposes by modifying Section 6045 of the Internal Revenue Code. The senators urged Secretary Yellen to clarify how the term will be interpreted by Treasury.
The response letter set out the process that Treasury and the IRS typically utilize in rulemaking and noted the intention to engage in this process as relates to the IIJA and acknowledged the debate among senators who negotiated the IIJA during the legislative process regarding the purpose and meaning of the modifications made to the definition of the term "broker" under Section 6045. The senators' debate on this issue addressed several important points about tax compliance related to information reporting on digital asset transactions and the intended effect of changes to Section 6045 on persons solely validating distributed ledger transactions or providing certain hardware or software, such as:
  • Recognizing that taxes legitimately owed on digital asset transactions should be paid, and that full and accurate transaction reporting is a proven way to make that happen.
  • Acknowledging that a lack of information reporting for digital assets increases the potential for abuse and the creation of a shadow financial system beyond the reach of established rules to combat illicit finance and tax evasion.
  • Describing the IIJA modification to Section 6045 as an effort to bring more clarity to the cryptocurrency industry and more certainty for people looking to invest in digital assets.
  • Asserting that cryptominers, who are solely involved with validating distributed ledger transactions through proof of work, would not be subject to broker reporting rules under section 6045.
  • Stating that persons solely staking digital assets for the purpose of validating distributed ledger transactions, or solely engaging in validating distributed ledger transactions through other validation methods associated with other consensus mechanisms, would not be subject to the IIJA broker reporting rules.
  • Indicating that persons solely engaged in the business of selling hardware or software for which the only function is to permit persons to control private keys which are used for accessing digital assets on a distributed ledger would not be subject to broker reporting rules under section 6045.
The response letter indicated that this dialogue would be part of the legislative history that Treasury would consider in its rulemaking process under IIJA.

Further Information on Digital Asset Regulation

For information on regulation of digital assets, see Practice Notes:
See also Practical Law's Crypto Toolkit.